Govt unveils radical FDI reforms after Raghuram Rajan's exit

Reuters | New Delhi
|
June 20, 2016

It's 100 per cent foreign direct investment in most sectors, including defence

These changes are fairly significant, particularly if you look at them in the context of what happened over the weekend with RBI Governor Raghuram Rajan's decision to step down—Shilan Shah, economist

India announced on Monday sweeping reforms to rules on foreign direct investment, opening up its defence and civil aviation sectors to complete outside ownership and clearing the way for Apple to open stores in the country.

The move comes two days after central bank governor Raghuram Rajan, a darling of financial markets but under pressure from political opponents at home, announced he would not seek another term, a surprise move that raised concerns about whether reforms he set in motion will stall.

Prime Minister Narendra Modi hailed the changes to the foreign direct investment (FDI) rules, stressing his government's reform credentials. He tweeted that the changes would make India "the most open economy in the world for FDI" and provide a "major impetus to employment and job creation".

"These changes are fairly significant, particularly if you look at them in the context of what happened over the weekend with Governor Rajan's decision to step down," said Shilan Shah, India economist at Capital Economics in Singapore.

"It might be the government's way to illustrate its commitment to reforms and mitigate any investor fallout following Rajan's decision."

The last time Modi's government announced a loosening of FDI norms was after his nationalist political party suffered a heavy defeat in a state election last autumn.

The new reform measures also relax restrictions on inbound investments in pharmaceuticals and single-brand retail.

Apple is expected to be a beneficiary of a three-year relaxation India is introducing on local sourcing norms with an extension of up to five years possible if it can be proven that products are "state of the art".

"We will inform Apple to indicate whether they would like to avail new provisions," Rajesh Abhishek, secretary of the Department of Industrial Policy and Promotion, told a news conference.

Other single-brand retailers like furniture giant IKEA also stand to benefit.

Defence contractors that have been reluctant to transfer technology to manufacture equipment in India would get the right to own local operations outright, with government approval, up from a cap of 49 per cent previously.

In other changes, India allowed 100 per cent FDI in civil aviation, following on from last week's launch of a new policy that lowered barriers to entry for airlines that want to fly international routes.

The government also allowed foreign companies to own up to 74 per cent in 'brownfield' pharmaceuticals projects without prior government approval. India already allows 100 per cent ownership of greenfield pharma businesses.